ANALYSIS OF THE IBC’s 2020 (AMENDMENT) ORDINANCE BY AMRI GUPTA

Article 123 of the Indian Constitution confers legislative powers to the Constitutional Head of India i.e. the President (Executive Organ) under which he/she can issue ordinances when neither of the two houses of the Parliament is in session. The power is used to meet the stability when the respective country encounters an emergency, here, COVID-19 pandemic. Recently, this power was used to replace the Insolvency and Bankruptcy (Amendment) Bill of  2019.

NEED OF IBC 2016:

After witnessing failure of the Companies Act 1956 and the SARFAESI Act 2002, Law Reforms Committee recommended the enactment of the Insolvency and Bankruptcy Code, 2016. Since then, it has been amended three times to ease the insolvency proceedings and to protect the interest of stakeholders. It has been termed as ‘biggest insolvency reform in economic history of India’. This Act led to the formation of the Insolvency and Bankruptcy Board of India (IBBI).

WHAT IBC AIMS AT?

It aims at amending and consolidating all the Insolvency laws of India by introduction of speedy trials of NPAs, thereby, protecting the interest of creditors and increasing their credit supply in the market followed by subsequent revival of the company in a time-bound manner. In the 2019’s Amendment, the rating threshold was reduced to enable public sector banks to purchase high-rated pooled assets. To prevent financial creditors from landing up into frivolous triggering of corporate insolvency, a threshold amount was created as a limit. (in simpler terms: Bankruptcy will not take place for small amounts [i]

Further, it promotes entrepreneurs and facilitates to maximise the assets of corporate persons.

IBC (AMENDMENT) ORDINANCE 2020:

Recently, an enactment of ordinance by President of India on 5th June, 2020 has lead to the suspension of Section 7, 9 & 10 of the Insolvency and Bankruptcy Code, 2016 and introduction of clause and subsection namely Section 10A & Section 66(3) into the 2016’s Code respectively. The above mentioned sections are kept at stay in observance of the COVID-19 pandemic.[ii]

SUSPENSION OF FILING OF CIRP APPLICATIONS:

It can be deduced from the suspension of Section 7, 9 & 10 that no filings with an intention to initiate Corporate Insolvency Resolution Process (CIRP) against Corporate Debtors can be initiated by Operational Creditor, Financial Creditor as well as by the companies themselves for the defaults which arose during disruption period which began started from 25th March, 2020 to 25th September, 2020 (i.e. six months), it can be extended up to a term of one year i.e. 24th March, 2021 which depends upon the government’s notification.

However, the defaults prior to 25th March, 2020 are not protected under Section 10A, therefore, creditors can initiate Corporate Insolvency Resolution Process against defaulters who welshed a payment which is dated prior to 25th March 2020.[iii]

THE EXTENT OF APPLICABILITY OF SECTION 10A:

The newly inserted Section 10A provides a sheath to those Corporate Debtors who defaulted and will default during the period of turmoil. The clause ‘shall ever be filed’ as mentioned in the first condition to Section 10A cannot be interpreted to grant suspension of CIRP filings in respect of the defaults arising after the disturbance period. If such an interpretation would be considered, then it would provide permanent protection to defaulters and subsequently promote Corporate Debtors to make further defaults and get immuned from insolvency proceedings by categorising their defaults under the disruption period. Therefore, the phrase ‘ever be filed’ cannot be extended to give permanent protection to defaulters otherwise it would fall under irrational interpretation.

The Corporate Debtors who defaulted in the payment during the relaxation period and restored during the same, they are protected under Section 10A. But if the default originated before the notified date and is restored or continues post-relaxation term, then there will be no suspension of CIRP filings against Corporate Debtors.[iv]

LEAVING MSME SECTORS INTO A VEXED STATE:

The present ordinance coupled with moratorium given by Reserve Bank of India on 22nd May, 2020 had protected Corporate Debtors from Operational Creditors ( mostly Micro, Small and Medium Enterprises) by extending the defaulting amount from 1 lakh to 1 crore (Section 4 of IBC, 2016 amended). But it would attract negative consequences to MSMEs (under Section 240 of 2016’s IBC) as they will be subjected to debtors’ willful non-payments because of the suspension of Section 9.

The change of defaulting limit from 1 lakh to 1 crore has left the Demand Notices which were issued before amendment by Operational Creditors in uncertainty. In order to initiate a Corporate Insolvency Resolution Process in case of default by Corporate Debtors, a Demand Notice under Section 8 has to be issued, only after its issuance the application can be filed under Section 9 before the Adjudicating Authority. The ordinance did not provide any resolution in respect of the Demand Notice issued prior the Amendment, further the threshold of 1 crore adds onto the tragedy which would be faced by MSMEs.

INTRODUCTION OF SUB-SECTION 3 INTO SECTION 66 OF IBC, 2016: 

The newly formed sub-section 3 reads,

“(3) Notwithstanding anything contained in this section, no application shall be filed by a resolution professional under sub-section (2), in respect of such default against which initiation of corporate insolvency resolution process is suspended as per section 10A.”

This section has to be read with sub-section 2. It protects company directors from getting caught under wrongful trading applications initiated by resolution professionals, thereby, a sigh of relief from wrongful trade provisions.[v]

WHAT ALL CAN BE CONCLUDED?

The ordinance provided an instant relief to the Corporate Debtors who are among those who are severely affected by the COVID-19 pandemic. Hence, the defaulters have time to reimburse and get back onto stable financial conditions. Additionally, it also considers the prevailing scenario in which it would be difficult to find a sufficient number of resolution applicants to rescue defaulters i.e. Corporate Debtors.

The uncertainty created by the ordinance for Operational Debtors and MSMEs is debatable, therefore, should be addressed in the most suitable manner. Failure of which might lead creditors to meet severe irreversible repercussions and it will put an additional pressure on Indian Judiciary.

REFERENCES

[i] https://iasgatewayy.com/ibc-amendment-bill-2020/

[ii] https://www.thehindu.com/news/national/parliament-passes-amendments-to-insolvency-and-bankruptcy-code-bill-2020/article31047969.ece

[iii] https://www.newindianexpress.com/business/2020/jun/08/ibc-amendment-ordinance-2020-no-fresh-insolvency-for-default-after-lockdown-declaration-2153907.html

[iv] Ibid.

[v] http://vinodkothari.com/2020/06/implications-of-ibc-ordinance-2020-quick-round-up/

DISCLAIMER: The views and opinions are that of the authors and do not necessarily reflect that of Katcheri.in.

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